The root cause of all things complex is simple (or how to explain the state of US economy)
While attending a recent holiday party and discussing the US Presidential elections, my dear friend suddenly asked me,
“You are a CTO, Leon. You solve very difficult problems every day. What’s wrong with the US economy?”
I began my career as a software engineer designing and engineering “must never fail” financial settlement systems. The core components of the system I was responsible for have been written in Assembler, despite the availability of higher level languages. Why? To ensure maximum awareness of the problem context and environment. This particular system even had its own access method to maximize I/O performance.
I learned a lot in my early career. But what I am most grateful for is an early encounter with the universal truth that the root cause of all things complex is simple. I learned the value of this universal truth while spending a few days looking for the root cause of a resilient memory leak.
The state of US economy resembles a classic memory leak – and I believe you will agree. The virtual address space is fairly large (think of it as the ability of US government to raise the debt ceiling and borrow more money). So ‘we’ allocated – or created – $16.3 trillion worth of debt.
But why can’t we seem to reduce our national debt? Referring to what every software engineer knows: in a classic address space model, there are memory release mechanisms. Translating to our fiscal reality, the US government collects tax revenue and use some of this tax revenue to pay the interest and principal on national debt, ideally reducing the debt to a manageable level. That’s why this is classic memory leak: debt grows faster than the payments towards the interest and principal.
But the question is – why?
I believe the answer is actually quite simple and lies in the labor participation rate which is now at the lowest point since 1981 at 63.5%.
To understand the sense of urgency, one does not even need to be an economist. You are a homeowner in a neighborhood with 100 houses. All 100 homeowners pay monthly association fees of $10 towards a monthly association management budget of $1000. Let’s place 50 homeowners in financial distress who cannot pay $10 a month. The remaining 50 homeowners still have to cover the basic maintenance needs of the association. Their monthly dues are now $20 (times 50 = $1000).
The state of US economy is largely equivalent to the problems of the above homeowner’s association. The US economy lost entire industries in 30 years and did not replace departing jobs with anything that carries the same economic benefit. Today, fewer and fewer Americans are able to participate in the economy and pay taxes. Which means that taxes for all of us in the US will go up without any additional economic benefits.
So what’s the solution?
When your US Senator or US Congressional Representative promises to create jobs, ask them to explain how their legislative agenda will foster growth first. Anyone who talks about job creation without first discussing how to generate growth ought to resign from the Congressional seat. Better yet, please exercise your right to critical thinking while voting.
Arguably, one of the biggest economic growth drivers of US economy has been the decision to build the interstate highway system, or The Dwight D. Eisenhower National System of Interstate and Defense Highways. Find some time to read this article from History.net.
I hope US Congress will find the lessons from the past just as applicable when trying to solve today’s problems.